News & analysis

Car tariffs may nip Eurozone green shoots in the bud

May 13, 2019

EUR

Sluggish March French Industrial Production didn’t prove to be much of a detriment for the single currency as the euro made some minor gains against GBP and USD over the day on Friday, although it did lose out against resource sensitive currencies like NOK and CAD. This week brings new updates on the green shoots in the Eurozone, with the German ZEW Economic Sentiment on Tuesday and the vital First Gross Domestic Product reading for Germany on Wednesday. These green shoots can be nipped in the bud, however, by potential US trade tariffs on European cars. President Donald Trump has until Saturday the 18th to decide on whether he wants to follow through on this, which could severely hamper Germany’s economy as it’s estimated that one in every eight German jobs either directly or indirectly depends on the car industry. As Germany is the Eurozone’s biggest economy, while the car industries of other European countries will be hurt as well, this appears as one of the main risks for Eurozone growth and the prospects of the euro at this moment.

GBP

Some argue the earth is flat. What cannot be argued, however, is the flatness of sterling at the back-end of last week’s trading. Brexit appears to be sinking further away into a swamp of undecidedness, and with the lack of developments in this area, sterling seems stuck around levels it has traded at for weeks now. This week, however, the Great British pound’s faith may be changing with some vital data coming out and the ever-present potential of a sudden shift in the tectonic plates colloquially known as British political fractions. First, Average Weekly Earnings are due on Tuesday, with wage growth being one of the main leading inflation indicators the Bank of England looks at to decide whether or not to increase the interest rate. Second, cross-party talks on Brexit between Labour and the Conservatives continue for the sixth week. Politico, therefore, estimates the lack of progress may lead to a breakdown in talks which would further decrease the potential for a quick consensus-based resolution for the Brexit issue.

USD

The US dollar sits flat as European markets open this morning despite trade tensions continuing to build over the weekend. On Sunday China’s state-run media accused Trump of breaking down negotiations, while Trump doubled down on his strong negotiating stance claiming “we are right where we want to be with China”. The game of brinkmanship continues, and there is more at stake than the growth of the respective economies – economic sovereignty and pride hinges on the result of this trade spat. This is evident in the Peoples Daily newspaper this morning where the state-run publication writes “at no time will China forfeit the country’s respect”. While the dollar floats in limbo, the same cannot be said for the Chinese yuan. Offshore yuan currently sits at a 2019 low, despite Chinese officials reiterating that it won’t use the currency as a weapon in the trade war. This week, US data will most likely prove redundant in moving the needle for the greenback as investors eye the potential release of draft tariffs on an extra $300bn of Chinese imports. Meanwhile, the 90-day period after the Department of Commerce report is coming to an end this week, meaning we may see potential US tariffs on EU car parts also. It is highly unlikely that the Trump administration will let the EU off the hook given its current vendetta against poor trade deals, but it may not be optimal to fight a war on two fronts. Many analysts expect the 90-day period to be extended for this reason.

CAD

The loonie sits in the red with other resource sensitive currencies this morning and remains susceptible to weakening further should tariffs increase. Although the Canadian dollar isn’t directly in the line of fire when it comes to the trade war, heightened relative risk level leaves the loonie open to further weakness. This narrative will become increasingly relevant should the trade war continue to drag on global growth as crude oil continues to battle with excess supply. Despite risks to further loonie weakness increasing, the Canadian dollar had a stormer on Friday after the economy added the most jobs since records began in April. This week, the data calendar concentrates around the release of CPI inflation releases on Wednesday at 13:30 BST.